The UK financial advice market is currently in a frenzy to get ready for the incoming regulation Consumer Duty, which is set to come in force on 31 July 2023 for all new and existing products and services that are currently on sale.
The Financial Conduct Authority (FCA) said at the time that the regulation will look to fundamentally improve how firms serve consumers. It will set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first.
There are also ‘four outcomes’ which are a suite of rules and guidance setting expectations for conduct in four areas such as:
- the governance of products and services;
- price and value;
- consumer understanding; and
- consumer support.
Gillian Hepburn, head of UK intermediary solutions at Schroders, told International Adviser that the Consumer Duty will not turn the advice market upside down as quickly as the Retail Distribution Review (RDR) did in 2013.
“Anything that encourages our industry to put the customer really at the heart of what we do has got to be good,” she said. “That’s the premise of this. If you think about a report card, it usually says ‘can do better’. There’s always something that we can do better or differently. It gives us a massive opportunity to sit back and take stock.
“I was asked a question the other day about whether I think it’s evolution or revolution. We had CP121 – which was 20 years ago. That was the first time we talked about breaking the link between product and commission.
“It took 10 years to get to that stage with RDR. If you forward on, we’re 10 years down the line and I think, in terms of Consumer Duty, it will probably take time. It’s not going to be something radical that changes the industry overnight.
“With RDR, there was some overnight changes like you had to be Level 4 qualified. That’s very black or white. Humans probably like to be given a clear direction and told what they need to do.. That is why Consumer Duty is a bit different.
“It’s thinking about what you do and judging yourself. I think things will change, but it might take some time. The world will not change overnight.”
Vagueness
The Consumer Duty regulation is vast and open to much interpretation. The FCA has set out guidelines but nothing regimented that advice firms need to implement.
This may mean that the regulation will take time to get going to know what exactly the FCA is looking for once it has been rolled out.
Hepburn said: “I actually think that supporting the client outcomes could be quite tricky based on the nature of the service that an adviser actually provides. The most interesting is the whole area around fair value. I use the example of fair value is based on what I’m expecting as a client.
“For me, my expectations and the reason I go to an adviser is I want to have a decent income in retirement, live the life I want to live for as long as I’m alive, and maybe pass something on to my kids.
“I will never know whether that actually happened because I’ll be dead. So, my assessment of value is really interesting. How do I measure that?
“So, value is I want to know that every six months when I meet my adviser, that I’m still on track to do that and I’m feeling comfortable. This will allow me to sleep at night, knowing that my money is being looked after based on the objectives that I have as a client. That is really difficult and is quite intangible to measure.
“I think that’s why this regulation will evolve over time because what we’ll start to see is really good practice in helping clients understand the value of advice.”
Next gen
One area of conversation that the regulation has started is how advice firms can take on next generation clients.
Post-RDR many advice firms went towards typically wealthy clients as the industry became more professionalised.
But, as a result, many of them moved away from doing things like mortgages and protection, which is exactly what next gen clients need.
This means that advisers are going to have to be creative to meet those clients’ needs when it comes to several areas of the Consumer Duty.
Hepburn added: “Many advisers are just not dealing with that segment. The number of advisers prepared to advise clients with less than £50,000 has dropped way down this year.
“That is really disappointing. Advisers maybe just need to be a little bit more creative. I think what we’re seeing is some really interesting models developing like subscription models.
“Obviously, we’ve got the simplified advice proposals which are now under review, but these could be interesting. For me, this is about encouraging that next generation to think about investing rather than just sticking it in Crypto.
“I think we need to engage differently with that next generation. I’ve also always said that putting a millennial adviser in your business is not necessarily the answer.
“We will see different models emerging in terms of how advisers might engage the next generation. Technology has got to be one of the answers to this.”
